MISSOURI HOUSING DEVELOPMENT COMMISSION LOW-INCOME HOUSING TAX CREDIT PROGRAM COMPLIANCE MONITORING MANUAL

Transcription

1 MISSOURI HOUSING DEVELOPMENT COMMISSION LOW-INCOME HOUSING TAX CREDIT PROGRAM COMPLIANCE MONITORING MANUAL REVISED September 2006 MISSOURI HOUSING DEVELOPMENT COMMISSION 4625 Lindell, Suite 300 St. Louis, Missouri (314)

2 TABLE OF CONTENTS Page PREFACE 1 1. INTRODUCTION The Missouri Housing Development Commission Background Compliance Period 2 A. All Credit Developments 2 B. Developments Receiving Credit Allocations after December 31, C. Credit Allocations for 1987, 1988, and 1989 Only 2 D. Determination of Final Year of Program Compliance Responsibilities 3 A. MHDC Responsibilities 3 B. Owner Responsibilities 3 C. Management Agent and On-Site Personnel 3 2. REGULATIONS Project Regulations 4 A. Minimum Set-Aside Election 4 B. Projects financed with Home Funds 4 C. Gross Rent Floor Building Regulations 5 A. The Applicable Fraction 5 B. Treatment of Resident Manager s Unit 5 C. Determining the Numerator and Denominator of the Applicable Fraction 5 D. Transferring Low-Income Households to Never-Occupied Units 6 E. Calculating the First Year Credit Percentage Unit Regulations for Determining Eligibility 7 A. Maximum Income Limits 7 B. Maximum Rent Limits 7 C. Utility Allowance 7 D. Rental Assistance Payments 7 E. Students 8 F. Household Size Rules Governing Units after Initial Occupancy of Qualified Low-Income Tenants 9 A. Annual Recertification of Income 9 B. Available Unit Rule 9 C. Unit Vacancy Rule 10 D. Examples of Minimum Set-Aside, AUR, and UVR Violations 10 E. Transfers of Existing Tenants to Another Unit COMPLIANCE MONITORING General The Compliance Manual Compliance Training Reporting and Notification Requirements 12 A. Sale, Transfer or Exchange of Development 12 B. Change in Management 12 C. Part II of IRS Form D. IRS Notices and Correspondence 12 E. Annual Owner Certification of Continuing Program Compliance 12 F. Schedule A, Annual Statement, IRS Form G. Annual Occupancy Reports 13 H. Utility Allowance Documentation 13 I. Financial Information Compliance Forms 14

3 TABLE OF CONTENTS (Page 2) 3.6 Tenant File Reviews and On-Site Physical Inspections 14 A. Inspection Requirements 14 B. Notification of Inspection 15 C. Preparation for the On-Site Physical Inspection 15 D. Tenant File Review and Physical Inspection Results 15 E. Written Notification of Results 15 F. Corrective Action Plan Recordkeeping Record Retention Noncompliance 16 A. Missing Reports, Information or Documentation 16 B. Code Violations 16 C. Correction Information 16 D. Chronic Noncompliance Disaster Relief QUALIFYING TENANTS Tenant Eligibility Acceptable Methods of Income Verification Effective Term of Income Verification Verification and Certification of Assets Differences in Reported Income Completion of the Tenant Income Certification Certification of Existing Residents of Acquisition and/or Rehabilitation Buildings Effect of Move-in Prior to Place-in-Service Date Annual Income 20 A. Annual Income Includes 20 B. Calculation Methodologies to Use in Determining Annual Income 21 C. Annual Income Excludes Assets 25 A. Net Household Assets Include 25 B. Net Household Assets Do Not Include 27 C. Assets Owned Jointly 28 D. Determining the Value of Assets 28 E. Actual and Imputed Income from Assets Computing the Total Household Income Initial Tenant Income Certification Guidelines Annual and Interim Income Recertification Requirements 31 A. Recertification of Income 31 B. Adding a New Member to an Existing Household 31 C. Changes in Student Status Miscellaneous Rules Governing Low-Income Eligibility of Units 32 A. Live-in Care Attendant 32 B. Section 8 Rental Voucher or Certificate 32 C. U S Citizen Status OTHER MHDC REQUIREMENTS Adjustments to Rent, Utility Allowance or Subsidy Rent Limits and Increases Projects with Outstanding Noncompliance Issues Leases 33 A. At a minimum, the lease should include 33 B. Lease Addendum 33 C. Initial Lease Term 33 D. Single Room Occupancy 34

4 6. WAIVER OF ANNUAL RECERTIFICATION FOR 100% LOW-INCOME DEVELOPMENTS PROPERTY SIGNS LEAD-BASED PAINT CERTIFICATION EXTENDED USE PERIOD COMPLIANCE MONITORING LIHTC PROGRAM GLOSSARY 40 EXHIBITS Exhibit A Owner s Certificate of Continuing Program Compliance E-1 Exhibit B Tenant Income Certification E-4 Exhibit C Employment Verification E-9 Exhibit D Under $5,000 Asset Verification E-10 Exhibit E Certification of Zero Income E-11 Exhibit F Student Verification E-12 Exhibit G Notice of Change in Ownership E-13 Exhibit H Annual Occupancy Reports for Non-internet Reporting E-15 Exhibit I Unit Certification E-16 Exhibit J Authorized Representative Designation E-17 Exhibit K Annual Certification of Continuing Program Compliance E-18 Exhibit L Affirmative Fair Housing Marketing Plan E-19 Exhibit M LIHTC Certification of Student Eligibility E-20 Exhibit N Lead Based-Paint and/or Lead Based Paint Hazards Form E-21 Exhibit O LIHTC Lease Addendum (Tenant Eviction Language) E-22 EXTENDED USE PERIOD Exhibits: Exhibit EUP-1 Non compliance Report Exhibit EUP-2 Annual Certification of Continuing Compliance Exhibit EUP-3 Annual Occupancy Report Exhibit EUP-4 Transfer Agreement Exhibit EUP-5 Sample Land Use Restriction Agreement ATTACHMENTS: Attachment 1 Section 42 of the Internal Revenue Code A-1

5 PREFACE This manual is a training and reference guide for the administration of the Low-Income Housing Tax Credit Program ( LIHTC or the Program ). It is designed to provide guidance for compliance with Section 42 of the Internal Revenue Code ( the Code ), the Land Use Restriction Agreement ( LURA ) and generally, to help answer questions regarding the procedures, rules, and regulations that govern LIHTC developments in Missouri. This manual should be used as a resource for owners, developers, management companies, and onsite management personnel. This manual is to be used only as a supplement to existing laws and rules and is by no means a comprehensive guide to the LIHTC program and all of its requirements. This manual was produced for utilization by LIHTC participants in Missouri and should be used in conjunction with the Code and the LURA, if applicable. Compliance monitoring by the Missouri Housing Development Commission (MHDC), is administered by the Asset Management Department, Director Deb Giffin. Questions regarding compliance issues should be directed to either John Driver (jdriver@mhdc.com) or Deb PLEASE NOTE: IRS Regulation (g) states that compliance with the requirements of Section 42 is the responsibility of the Owner of the building for which the credit is allowable. The Agency s obligation to monitor for compliance with the requirements of Section 42 does not make the Agency (or its officers and employees) liable for an Owner s noncompliance. Because of the complexity of the Code and the necessity to consider its applicability to specific circumstances, owners are urged to seek competent professional legal and accounting advice regarding compliance issues. The procedures and reporting forms herein have not been approved by the Internal Revenue Service (the IRS ) and should not be relied upon for interpretation of Federal income tax legislation or regulations. 1

6 1. INTRODUCTION 1.1 THE MISSOURI HOUSING DEVELOPMENT COMMISSION MHDC was established in 1969 by the 75 th General Assembly to assist in the creation of low and moderate income housing for the State of Missouri (the State ). The legislature established a governing body, the Commission, which is currently composed of ten members. The Governor, Lieutenant Governor, the State Treasurer and the Attorney General serve on the Commission by virtue of office. The remaining six members are appointed by the Governor, with the advice and consent of the Senate, for staggered terms of four years. MHDC programs are varied and are available to low and moderate income Missourians, regardless of race, creed or national origin. 1.2 BACKGROUND MHDC has been designated by the Governor as the Housing Credit Agency for the State. This designation gives MHDC the responsibility of administering the LIHTC Program established by the Tax Reform Act of 1986 and codified as Section 42 of the Internal Revenue Code. The responsibilities of a Housing Credit Agency are defined in Section 42(m) of the Code, as amended. One of the statutory duties of the Housing Credit Agency is to monitor for and notify the IRS of any noncompliance with the provisions of the Code and/or any such State requirement documented in the LURA. 1.3 COMPLIANCE PERIOD A. All Credit Developments - In order to claim the credit, all developments receiving a credit allocation since 1987 must comply with all eligibility requirements for a period of 15 taxable years beginning with the first taxable year of a building's credit period. The credit period for a building begins in either the year it is placed in service or the first year after, as declared in Part II of the IRS Form This 15 year period is referred to in the Code as the "Compliance Period [Section 42(i)(1)]. B. Developments Receiving Credit Allocations after December 31, 1989 are required by the Code to comply with all eligibility requirements for an additional 15 years beyond the initial 15 year compliance period for a total of 30 years. This additional 15 year period is referred to in the Code as the Extended Use Period [Section 42(h)(6)(D)]. These developments are also required to enter into an extended low-income housing commitment [Section 42(h)(6)], the LURA, with MHDC at the time that a final allocation of credit is issued. The LURA sets forth the eligibility requirements that must be complied with during the compliance and extended use periods and is recorded, as a restrictive covenant against the property, in the County in which the development is located. C. Credit Allocations for 1987, 1988, and 1989 Only As stated above, developments receiving a credit allocation prior to January 1, 1990 are restricted for the initial 15-year compliance period only. However, any building in such a development that received an additional allocation of credit after December 31, 1989 must comply with eligibility requirements in effect beginning January 1, 1990 and as stated in both Section 42 and the Land Use Restriction Agreement. D. Determination of the Final Year of Program Compliance To enable MHDC to determine a property s final year of Program compliance, MHDC must be provided with a copy of the First Year Certification Part II of IRS Form 8609, as executed by the owner and filed with the IRS. If this cannot be provided, MHDC will require the development to remain in the program through December 31 st of the sixteenth year, for credit allocations, or December 31 st of the thirty-first year, for credit allocations of 1990 and thereafter. 2

7 1.4 RESPONSIBILITIES A. MHDC Responsibilities MHDC allocates tax credits through the LIHTC Program for the construction, acquisition and/or substantial rehabilitation of low-income housing within the State. MHDC also monitors for adherence to both IRS and MHDC requirements during the compliance and extended use periods. Once a final allocation is awarded to a development, the Asset Management Department of MHDC will: 1. Provide a Compliance Monitoring Manual; 2. Review and provide written consent to any material changes, such as a proposed change of property management or proposed sale, transfer or exchange of the development. 3. Review Annual Submissions; 4. Conduct physical inspections of the properties and perform on-site reviews of the management and resident files. 5. Evaluate requests for rent increase (see 5.2) 6. Notify the IRS of any non-compliance. B. OWNER Responsibilities Each owner has chosen to utilize the LIHTC Program to take advantage of the tax benefits provided. Certain requirements must be met in order to remain eligible for the tax benefits. It is the responsibility of the owner to ensure that the property is managed in accordance with all applicable laws, rules, regulations and policies that govern a LIHTC property. These owner responsibilities include, but are not limited to the following: 1. Administration a. To ensure that the development remains in compliance with all Program requirements. b. To maintain the development so as to ensure that it is suitable for occupancy at all times, taking into account local health, safety and building codes. c. To provide appropriate training to the on-site management team and submit evidence to MHDC of such training every 2 years d. To maintain copies, on site, of all regulatory documents (LURA, compliance manuals, etc.) necessary for the successful management of the property. e. To utilize program resources, which include, but are not limited to, reference materials and competent legal and accounting assistance. f. To make certain the on-site management team complies with all applicable rules, regulations and policies that govern the development, including the Fair Housing Act of 42 U.S.C g. To ensure that all records are complete and retained so as to comply with IRS Regulation (b)(1). h. To maintain the rents at the level prescribed by MHDC. Any and all rent increases must be approved by MHDC prior to implementation. i. To update the Affirmative Fair Housing Marketing Plan every 3 years. j To notify MHDC-LIHTC Compliance staff that issues of non-compliance have been corrected and the building is back in LIHTC compliance. K. To notify MHDC of sale by submitting the Exhibit G 2. Compliance Training Developments that are placed-in-service in 2003 and thereafter will be required to have the Owners and their on-site managers complete a compliance training session that is either approved or conducted by MHDC, prior to receiving IRS FORM In addition, any and all new managers will be required to attend a compliance training session, with ongoing training to be updated at least every 2 years. A compliance provider listing can be found on our website, 3

8 C. Management Agent and On-Site Personnel The owner, managing agents and representatives are responsible for the correct implementation of the LIHTC Program requirements. Anyone who is authorized to lease apartment units to residents must be thoroughly familiar with all federal laws, rules and regulations governing certification and leasing procedures. The management company is required to provide information, as needed, to MHDC and submit all required reports and documentation in a timely manner. 1. Noncompliance If the management company determines that the development is not in compliance with LIHTC Program requirements, MHDC must be notified immediately and steps taken, with MHDC s guidance, to correct the noncompliance whenever possible. NOTE: It is the Owner/Management Agent s responsibility to notify MHDC of any noncompliance issues that have not been corrected by submitting a Corrective Action Plan and it is the owner/management agent s responsibility to update the action plan by the 10 th day of every month until all outstanding items have been corrected. It is the Owner/Management Agent s responsibility to notify MHDC when any noncompliance issues have been corrected. 2. Regulations Program requirements are contained in Section 42 of the Code (included as Attachment 1). Program changes and revisions made by the Budget Reconciliation Acts of 1989, 1990 and 1993 are incorporated within the Code. Additionally, the IRS publishes periodic revenue notices (not included in the manual), rulings, regulations, and procedures that clarify and/or expand on the law. The following items highlight some of the Code provisions that directly affect project compliance. This list is not intended to provide a complete listing of compliance regulations. 2.1 PROJECT REGULATIONS A. Minimum Set-Aside Election Section 42(g) states that to be a qualified low-income housing project the project must meet one of two possible minimum set-asides. In Missouri, the owner commits to a specific minimum set-aside for the project during the application process. This election, once made, is irrevocable. If the project does not meet the minimum set-aside by the end of the first year of the credit period, the property does not qualify as a low-income housing project and loses the credit that was awarded to it. Noncompliance also occurs if the project drops below its minimum set-aside anytime during the subsequent compliance period. The minimum set-asides are: 1. 50% - At least 20% of the residential units are both rent-restricted and occupied by individuals whose income does not exceed 50% of area median gross income ( AMGI ) adjusted for household size. It is important to understand that if this minimum set-aside is chosen, ALL of the LIHTC units must be rent-restricted and occupied by individuals whose income does not exceed 50% of AMGI % - At least 40% of the residential units are both rent-restricted and occupied by individuals whose income does not exceed 60% of AMGI, adjusted for household size. B. Projects financed with HOME Funds Under a special statutory rule [Section 42(i)(2)(E)], projects with below-market HOME funded loans, made after August 10, 1993, may avoid being classified as federally subsidized and qualify for the 9% Credit. To qualify for the 9% Credit, 40% or more of all the residential units (including market rate) in every building must be occupied by individuals with income of 50% or less AMGI. Example: A project is financed with a below-market HOME loan. The project contains 4 buildings of 4 units each. 40% of 4 units = 1.6 units. To meet the 40% restriction, 2 units in each building must be occupied by individuals with income of 50% or less AMGI. C. Gross Rent Floor (IRS Revenue Ruling 94-57) 4

9 In general, a decrease in the area median gross income will require a reduction in the gross rent charged to low income tenants. However Revenue Ruling established that the gross rent for a unit does not have to be reduced below the maximum rent that was permitted on the effective date of the Gross Rent Floor Election. For projects which received an initial allocation or a letter of determination (tax exempt bond projects) after October 6, 1994 the Gross Rent Floor takes effect when a project receives its initial LIHTC allocation, unless the owner chooses to designate a building's placed-in-service date as the effective date. For projects that received an initial allocation or a letter of determination prior to October 6, 1994, the effective date of the Gross Rent Floor is when the project received its initial LIHTC allocation. 2.2 BUILDING REGULATIONS A. The Applicable Fraction The applicable fraction represents the percentage of a building intended for qualified lowincome units. The targeted applicable fraction is assigned to a building at the time of final credit allocation (issuance of IRS Form 8609). However, a final determination of the maximum applicable fraction is made at the close of the first year of the credit period. The maximum credit an owner can claim on a building is based on the lesser of the targeted applicable fraction (8609) or the actual applicable fraction on the last day of the initial LIHTC year. (See IRS Form Schedule A, "Annual Statement" for complete instructions on calculating the building's first year applicable fraction.) The applicable fraction is calculated as the lesser of: 1. The number of low-income units in a building divided by the total number of units (whether or not occupied) in a building; OR 2. The total square footage of low-income units in a building divided by the total square footage of all units (whether or not occupied) in a building, with the exception of the manager s unit, which may or may not be included, depending on the following circumstances. B. Treatment of Resident Manager s Unit (IRS Revenue Ruling 92-61) NOTE: MHDC must give prior written approval for Manager s units. 1. Buildings Placed-In-Service Prior to September 9, The manager's unit is considered a qualified low-income unit. The rent is restricted and the resident manager's household income can not exceed the applicable income limit. Example: A LIHTC building with 25 units (of the same size) is placed-in-service on January 1, One unit is set aside for a full-time resident manager. The resident manager is income qualified and the rent is restricted. If 21 of the units are qualified low-income units (including the manager's unit) and 4 of the units are market-rate, the applicable fraction for this building is 84.00% (21/25). 2. Buildings Placed-In-Service After September 9, The full-time resident manager's unit is treated as common space. The unit is excluded from both the numerator and the denominator of the applicable fraction in determining the building's qualified basis. Reference Sect. 42 Appendix 20 Example: A LIHTC building with 25 units (of the same size) is placed-in-service on January 1, One unit is set aside for a full-time resident manager. If 20 of the units are qualified low-income units and 4 of the units are market-rate, the applicable fraction for this building is 83.33% (20/24) 3. Maintenance Personnel The Code (IRS Revenue Ruling 92-61) defines units for resident managers or maintenance personnel as facilities reasonably required by a project that are functionally related and subordinate to residential rental units. Therefore, if maintenance personnel are reasonably required to make operations run smoothly, such units may be treated the same as described in B.1 and B.2 above. It is the responsibility of each development and its legal counsel to determine eligibility of such units. C. Determining the Numerator and Denominator of the Applicable Fraction 5

10 When determining which units to include as low-income units in the numerator of the fraction and total units in the denominator of the fraction, please note: 1. Units Never Occupied - Units that have never been occupied cannot be included in the numerator (low-income units), but must be included in the denominator (total units). 2. Vacant Units - Units that are vacant at the end of the initial tax year which previously were qualified as low-income units can be considered to be low-income for determining the amount of credits claimed, only if the units were occupied for a minimum of one full month. D. Transferring Low-Income Households to Never-Occupied Units Transferring low-income households to never occupied units in order to establish a higher first year applicable fraction is not allowed. Any household that transfers to a different unit during the initial year of the compliance period will only be counted as qualifying one unit. Example: A building with 10 units (of the same size) is placed-in-service on March 1, The owner has a targeted applicable fraction of 100% and plans to take credit for the first time for On November 30, 2000, nine of the units were rented to qualified lowincome households. Unit #108 has never been occupied. The applicable fraction is 90% for the month. On December 1, 2000, the tenant in Unit #101 transfers to Unit #108. The applicable fraction remains at 90% for December. E. Calculating the First Year Credit Percentage: For the first year of the credit period, you must use a modified percentage to reflect the average portion of a 12-month period that the units in a building were occupied by lowincome individuals. To calculate the modified percentage, take the low-income percentage as of the end of each full month that the building was in service during the year. Add these percentages together and then divide by 12 (per IRS Form 8609, Schedule A). Example: Assume that a low-income building placed-in-service in December and so chose to delay the first credit year until the following year. During that first year of the credit period the building had the following lease-up schedule. Month Occupied Low-Income Units Total Units Occupied Units Divided By Total Units Monthly Applicable Fraction January % February % March % April % May % June % July % August % September % October % November % December % TOTAL of Monthly Applicable Fraction 800 TOTAL Divided by % The amount of credit allowed on this building for the first year would be 66.67% based on the lease-up schedule. The applicable fraction at the end of the first year of the credit period is 100% UNIT REGULATIONS FOR DETERMINING ELIGIBILITY A. Maximum Income Limits In order for a household to qualify for a low-income unit in a LIHTC development, their income must not exceed the applicable AMGI. This must be determined before the household is allowed to occupy any LIHTC unit. 6

11 The United States Department of Housing and Urban Development (HUD) publishes AMGI information for each Missouri County on an annual basis. Limits remain in effect until the effective date of the next year s published limits. Upon receipt of the updated HUD median income information, MHDC will make every effort to place the new annual income limits and corresponding rent limits for projects in Missouri on MHDC's Internet site ( However, it is the owner's responsibility to obtain the limits when they are published by HUD and to implement the new limits within 45 days of the effective date. B. Maximum Rent Limits Similar to restrictions on tenant income, restrictions also exist on the amount of rent that can be charged for a low-income unit. 1. Projects Receiving a Credit Allocation From 1987 Through 1989 The gross rent, including utilities, for pre-1990 projects is based on the number of occupants in the unit. Example: A unit is occupied by 4 household members. The maximum allowable rent is 30% of the AMGI for a household of four. All rent calculations for pre-1990 rents should be rounded down to an even dollar amount AMGI for household of 4 = $23,350 $23,350 is multiplied by 30% = $ 7,005 $7,005 is divided by 12 = $ $ is rounded down = $ 583 The Omnibus Budget Reconciliation Act of 1993 allowed owners to make a one-time election to make the change from maximum rents based on household size to maximum rents based on number of bedrooms. If the election was made, the new rent calculation applies only to tenants that moved in after the election date 2. Projects Receiving a Credit Allocation after December 31, 1989 or that made the Election discussed above - The gross rent, including utilities, paid by a LIHTC tenant may not exceed 30% of the applicable AMGI based on an assumed 1.5 persons per bedroom. The maximum rent, by bedroom size, is also published on an annual basis by HUD (See A above). C. Utility Allowance: If the cost of any utilities (other than telephone and cable) is to be paid directly by the tenant, the gross rent for that unit must include an allowance for those utilities. A copy of the updated Utility Allowance must be sent in annually with your Annual Compliance Reports. The source used to calculate the utility allowance must be the same throughout the year. The applicable utility allowance is determined as follows: 1. If a project receives assistance under Rural Development (RD) Section 515, the applicable utility allowance is the utility allowance determined by RD. 2. If a project is HUD regulated, the applicable utility allowance is the HUD utility allowance. 3. All other projects use the local Public Housing Authority utility allowance established for the Section 8 Existing Housing Program. 4. All other projects may also use the actual utility costs from the Utility Company. D. Rental Assistance Payments Gross rent does not include any payment from HUD Section 8, RD Section 515, or any comparable rental assistance program. In other words, only the rent and utilities (if applicable) paid by the tenant are counted toward the maximum rent of a qualified LIHTC unit. An increase in the rent paid by a HUD Section 8 or RD Section 515 tenant to an amount that is greater than the maximum LIHTC rent may not disqualify the LIHTC unit if the rent increase is mandated under the provisions of the Section 8 program or Section 515 rental assistance. Such a rent increase may occur if a tenant's income increases significantly, since tenants under these HUD and RD (RD) programs are required by statute to pay rents equal to 30 percent of their adjusted monthly incomes. The amount of rent paid by the tenant in excess of the LIHTC rent limit is known as the "rent overage". The rent overage is treated as follows: 7

12 1. Section 8 Project-Based - The increase in the tenant's rent payment is allowed if the Section 8 subsidy is reduced by the rent overage. 2. RD Section 515 a. For properties built before 1991, the rent overage cannot be charged to the tenant, and the owner is responsible to pay the difference. b. For properties built in 1991 and later, the rent amount exceeding the LIHTC rent limit can be collected by the owner, but the owner must pay the overage to RD. E. Students 1. An individual who is a full-time student or a household where all members are full-time students are not considered qualified tenants for an LIHTC property. The owner/management is required to verify in writing, whether or not applicants and/or existing tenants are full-time students. All adult household members must complete the Non Full-Time Student Affidavit (Exhibit M) prior to admission into a LIHTC property. 2. Full-time students are persons enrolled on a full-time status at an educational institution for at least five calendar months during any taxable year. The Student Verification form (Exhibit F) is required for all full and part-time students. All student financial aid in excess of tuition must be verified and included as income. 3. In general, an educational institution is a school that maintains a regular faculty, an established curriculum, and an organized body of attending students. The definition of full-time is determined by the educational institution. The IRS has stated that the definition of Full Time Student for the purpose of this Program was intended to include institutions of primary education. 4. Section 42(i)(3)(D) of the Code provides exemptions to the student rule for certain student types. An applicant claiming any of the exemptions must be able to provide documentation to prove that status. For a student to be considered a qualified tenant, they must be one of the following: a. A student and receiving assistance under Title IV of the Social Security Act; b. A student enrolled in a job training program receiving assistance under the Job Training Partnership Act or under a similar Federal, State or local program; c. A student that is a single parent with children and such parent and children are not dependents (as defined in IRC Section 152) claimed by another individual; d. A student that is married and files a joint tax return. 5. Should any member of a previously qualified low-income household become a fulltime student, the household must meet one of the exemptions above in order to remain eligible under the Program rules. The owner/management agent must verify in writing whether the household meets the exemption claimed above. If the household does not qualify for one of the exemptions, the unit becomes a market unit. 6. All properties must incorporate a lease provision requiring tenants to immediately notify management of any change in student status. F. Household Size Household size determines the maximum allowable income. It is also necessary for determining maximum rent limits in pre-1990 projects where maximum rent limits are based on household size, not the number of bedrooms. There are two considerations that affect the determination of household size: 1. What constitutes a household? Any group of persons that choose to live together should be treated as a household. The income of each person must be included to determine the eligibility of the household under applicable income limits. 2. Who counts as a household member? a. Year-round occupants; b. Members temporarily away (e.g. Military personnel on temporary duty, children away at school, children temporarily absent due to placement in a foster home). c. Children under joint custody, living with this household at least 50% of the time. d. Unborn children of pregnant women. 8

13 e. A household in the process of adopting a child is treated the same as a pregnancy. f. Family members in the hospital or rehabilitation facility for periods of limited or fixed duration; and. g. The family decides if persons permanently confined to a hospital or nursing home will be included in the family size for determining the income limit h. Any adult household member that moves in with a current qualified household within the first 6 months of the initial occupancy period. The household must recertify and qualify as if they are an initial qualifying household. 2.4 RULES GOVERNING UNITS AFTER INITIAL OCCUPANCY OF QUALIFIED LOW-INCOME TENANTS A. Annual Recertification of Income IRS Regulation (c) The owner/management is required to recertify each low-income household at least annually. The recertification process is identical to the initial certification in terms of documenting household composition, income and student status. Failure to recertify a household within 365 days of the last certification date is a reportable violation to the IRS. B. Available Unit Rule IRS Regulation If a recertification of income reveals that a household s income now exceeds the applicable income limit by more than 140%, the unit becomes an over-income unit and the Available Unit Rule (the AUR ) goes into effect. An over-income unit can continue to be treated as a low-income unit as long as available vacant units of comparable or smaller size in the same building are rented to eligible households and the rent for the unit continues to be restricted. In a mixed-income project, this rule effectively requires the owner/management to substitute another unit that qualifies as a low-income unit for the unit with the over-income household in order to maintain the building s qualified basis. 1. Key Concepts of the Available Unit Rule Include: a. In a project containing more than one low income building (non-tax-exempt bond financed), the AUR applies separately to each building. {IRS Regulation (e)}. b. In a tax-exempt bond financed project containing more than one low-income building, the AUR is applied on a project basis {IRS Regulation 1.42(d)(3)(B)}. c. If a tax-exempt bond financed project is also receiving LIHTC and contains more than one building, the AUR is applied on BOTH a building and project basis. d. A household whose income rises above 140% of the current income limit may still be considered a low-income household IF the rent remains restricted AND the next available unit(s) is rented to a qualified low-income household. e. All comparable units that are available or that subsequently become available in the same building must be rented to qualified households in order to continue to count the over 140%-income unit as a low-income unit. Once the percentage of low-income units in a building (excluding the over-income units) equals the percentage of low-income units on which the credit is based, failure to maintain the over-income units as low-income units has no immediate significance. f. If any comparable unit that is available or that subsequently becomes available is rented to a nonqualified resident, all over 140%-income units, within the same building, for which the available unit is comparable or smaller lose their status as low-income units. g. For purposes of determining whether a residential unit is comparably sized, a comparable unit must be measured by the same method used to determine qualified basis for the credit year in which the comparable unit became available. 1. If the qualified basis was determined using the square footage percentage, then a comparable unit is measured by square footage; i.e., a comparable 9

14 unit is any unit that has the same or less square footage as the overincome unit; or 2. If the qualified basis was determined using the unit fraction, then a comparable unit is measured by the number of bedrooms. h. A unit is not available for purposes of the AUR when the unit is not available for rent due to a reservation that is binding under local law. i. When a current resident moves to a different unit within the building, the newly occupied unit adopts the status of the vacated unit. j. It is the intent of the AUR to replace all over 140%-income households with new qualified households as available units are rented. C. Unit Vacancy Rule IRS Regulation (c)(ix) The Unit Vacancy Rule (the UVR ) is applied on a project basis. A building is considered in compliance when the current applicable fraction is at or above the first year's fraction. Under the UVR, if a building is at or below its applicable fraction and a tenant vacates a qualified unit, reasonable attempts must be made to rent that unit or the next available unit of comparable or smaller size to a qualified low-income household before any units of comparable or smaller size in the project are rented to non-qualifying (market) tenants. When a qualified low-income unit becomes vacant and reasonable attempts are being made to rent that unit, the unit will continue to be included as a qualified low-income unit for meeting the minimum set-aside and in calculating the applicable fraction of the building, so long as the requirements of the UVR are adhered to. Owners and management agents should document all efforts to rent to a qualified low-income household. When the UVR is violated, all units of comparable or smaller size that are rented to market-rate households prior to renting to a low-income household will be reported to the IRS as a violation. D. Examples of Minimum Set-Aside, AUR and UVR Violations Bluff Manor Apartments is a one-building LIHTC project consisting of 10 two-bedroom units of equal size. Units 1 through 5 are rented to qualifying low-income tenants; Units 6 through 10 are rented to market-rate tenants. The owner chose the 40/60 set-aside election. At the end of the first year for which credit was claimed, the owner established an applicable fraction of 50% (5 of 10 units). Example 1: Units 1 and 2 are recertified; the income of the tenants in both of these units has increased above 140% of the AMGI. At the same time, Unit 6 vacates and a new market-rate tenant moves in. Several violations have taken place. 1. The AUR went into effect when Units 1 and 2 were recertified and remained in effect when the vacancy in Unit 6 occurred. Since Unit 6 was rented to a market-rate household, the AUR has been violated. 2. As soon as the market-rate tenant moved into Unit 6, Units 1 and 2 changed to market-rate status. Therefore, seven units are now market-rate units and cause the applicable fraction to be 30%, thus violating the minimum set-aside rule. Reportable violations include both Minimum Set-Aside and Qualified Basis. Example 2: Qualified low-income Units 1, 4, and 5 vacate. Unit 4 is rented first, to a market-rate household. This causes Units 1, 4, and 5 to be in violation of the UVR. All three of these units are now considered market-rate units, causing the applicable fraction of the building to decrease to 20%. The project has fallen below the minimum set-aside and the established applicable fraction of 50% and has violated the UVR requirements. Reportable violations include the UVR, Minimum Set-Aside and Qualified Basis. E. Transfers of Existing Tenants to Another Unit 1. Transfer Within The Same Building Effective September 26, 1997, an existing qualified household may transfer to a different unit in the same building of the project. When a qualified household moves to a different unit within the building, the newly occupied unit adopts the status of the vacated unit. 2. Transfer To A Different Building Should an existing qualified household wish to transfer to another unit in a different building of the project, the household must be treated as a new household. All 10

15 application, verification, and certification procedures must be completed for the transferring household and the household must be income qualified using the current maximum allowable income limit for a new household. 3. COMPLIANCE MONITORING 3.1 GENERAL This section of the manual outlines MHDC's procedures for monitoring all projects receiving the LIHTC. Monitoring is designed to determine if the development is in compliance with federal and state regulations and with MHDC policies. However, compliance is solely the responsibility of the owner and is necessary to retain and use the credit. Monitoring each project is an ongoing activity that extends throughout the credit compliance and extended use period. MHDC is required by Code to conduct this compliance monitoring and is required to inform the IRS of noncompliance, or the failure of the owner to certify to compliance, no later than 45 days after the period of time allowed for correction. MHDC is required to notify the IRS whether the noncompliance has or has not been corrected. The compliance monitoring process is made up of the following components: A. The Compliance Manual; B. Compliance Training Workshops; C. Reporting and Notification Requirements; D. Compliance Forms; E. Tenant File Reviews and On-Site Physical Inspections; F. Recordkeeping; G. Record Retention; and H. Noncompliance. 3.2 THE COMPLIANCE MANUAL MHDC will provide the compliance manual on MHDC's Internet site ( The manual may be printed or viewed on-line. The manual describes MHDC's compliance monitoring procedures that the owner and management agent must follow. Updates to the manual will be made as changes to the Code and/or MHDC's procedures occur. The required reporting and certification forms that must be used and submitted to MHDC, as well as sample resident eligibility forms are also available on MHDC's Internet site. 3.3 COMPLIANCE TRAINING Developments that are placed-in-service in 2003 and thereafter will be required to have the Owners, and their on-site managers complete a compliance training session, that is either approved or conducted by MHDC, prior to receiving the IRS FORM In addition, any and all new managers will be required to attend compliance training session as a condition of the approval of any new management contract as described in Section 1.6 B. MHDC will provide owners with a schedule of available training sessions for the year. The purpose of the training is to provide instruction on: A. A sampling of the basic IRS Code Compliance requirements B. IRS final regulations for compliance monitoring C. MHDC policy and procedures for compliance reporting D. MHDC policy and procedures for Resident File Reviews and On-Site Physical Property Inspections E. Equal housing opportunity and fair housing regulations and policies F. Specific information on the following low-income resident eligibility requirements: 1. Income and Rent Limits 2. Definitions of Income and Assets 3. Certification of resident Income and Assets 4. Verification of resident Income and Assets 5. Leases 6. Student Eligibility 11

16 7. Reporting Violations of the Program 8. Other owner responsibilities, including notifying MHDC of any change in management or ownership of the project. 3.4 REPORTING AND NOTIFICATION REQUIREMENTS Failure to supply the required information and/or reports by the due date will be considered noncompliance. The owner will have 30 days from the date of notification in which to submit the required information. MHDC may grant an extension to this time period if it is determined that there is good cause based on a written request sent by the owner and/or management agent prior to the date the information and/or report is due. A. Sale, Transfer or Exchange of Development. The Owner must notify MHDC in writing and receive prior consent of any proposed sale, transfer or exchange of the development. A Notice of Change in Ownership (Exhibit G) must be completed and submitted as part of the request. B. Change in Management. The Owner must notify MHDC in writing and must provide evidence of training and experience. MHDC reserves the authority to deny a management company based on lack of experience. A property data sheet and an Exhibit J must also be completed. C. Part II of IRS Form A copy of the First Year Certification Part II of IRS Form 8609, as executed by the owner and filed with the IRS must be provided to MHDC, within 90 days after the end of the first year of the credit period. D. IRS Notices and Correspondence A copy of any and all notices and correspondence from or with the IRS, concerning the development or the owner, must be provided to MHDC. Copies must also be made available to MHDC compliance officers during the on-site review. E. Annual Owner Certification of Continuing Program Compliance The Owner must submit to MHDC, on an annual basis, the Owner s Certificate of Continuing Program Compliance (Exhibit A). The Certification must be received by MHDC no later than March 31 of the year following the reporting period. The Certification must have the owner's original signature and date and must be notarized. Signatures of a person other than an authorized signatory of the ownership entity will not be accepted. Effective 2003 Annual Reporting must be submitted through the Certification On line. Additional information can be found on our web site at Manual submission will only be accepted by developments with 12 units or less. F. Schedule A, Annual Statement, IRS Form A copy of the IRS filed Schedule A, Annual Statement, IRS Form 8609, for each building, must be submitted annually along with the Owner s Certificate of Continuing Program Compliance. G. Annual Occupancy Reports Beginning with the 2005 reporting period, the submission deadline for the Annual Owner s Certificate of Continuing Compliance (Exhibit A) and the Annual Occupancy Report have changed. The due dates are based on the year the last building was/is placed in service as indicated on the schedule. SEASONAL REPORTING SCHEDULE Placed In Service Date Annual Report Due Date Activity Period 1990,1991,1992,1993, 2006 April 15 April 1 March ,1995,1996,1997 July 15 July 1-June ,1999,2000,2001 October 15 Oct.1 Sept ,2003,2004,2005 January 15 Jan. 1 Dec

17 Please check the MHDC website at for the due dates for developments placed in service after NOTE: For developments that have entered the Extended Use Period, COL does not currently accept properties operating in the Extended Use Period. The Exhibits EUP1-5 are available in the Exhibits section of this manual. H. Utility Allowance Documentation MHDC requires that documentation for the utility allowance(s) used for the prior year be submitted annually along with the Annual Occupancy Reports. If there has been no change in the PHA's utility allowance, this must be documented by the PHA. NOTE: For units that have been remodeled to a different bedroom size, the total Utility Allowance remain unchanged as long as the total square footage of the unit remains unchanged. I. Financial Information 1. Financial Statements a. For developments of 13 or more units, audited annual financial statements must be submitted to MHDC no later than March 31 of the following year. b. For developments with 12 units or less, MHDC will accept the submission of an annual certified compilation report in lieu of the audited annual financial statement. This report must be submitted to MHDC no later than March 31 of the following year. c. The request should be directed to the Accounting Department, in the St. Louis office of MHDC with Annual Financial Statement clearly indicated on the front of the package. 2. Proposed Operating Budget a. All developments must submit to MHDC a proposed operating budget for the upcoming year. The budget must be received by MHDC no later than November 15 th of each year. The required budget format is available on the MHDC website ( b. The request should be directed to the Accounting Department, in the St. Louis office of MHDC with Proposed Operating Budget clearly indicated on the front of the package. 3.5 COMPLIANCE FORMS The following MHDC forms must be used. No other forms will be considered acceptable. These forms are to be retained as described in Section 3.8, Record Retention Requirements: A. Owner s Certification of Continuing Program Compliance (Exhibit A) B. Tenant Income Certification (Exhibit B) (HUD 50058/50059 and RD 1944-A can be used in place of Tenant Income Certification) See Section 4.6 for Rehabilitated developments. C. Employment Verification (Exhibit C) D. Under $5,000 Asset Verifications (Exhibit D) NOTE: Not required if all assets are verified E. Certification of Zero Income (Exhibit E) F. Student Verification (Exhibit F) G. Notice of Change in Ownership (Exhibit G) H. Annual Occupancy Report (for not internet filing) (Exhibit H) I. Unit Certification form (Exhibit I) J. Authorized Representative Designation (Exhibit J) K. Annual Certification of Continuing Program Compliance (Exhibit K) L. Affirmative fair Housing Marketing Plan (Exhibit L) HUD form M. Non Full-Time Student Affidavit (Exhibit M) N. Lead-Based Paint Notification (Exhibit N) O. LIHTC Lease Addendum (Tenant Eviction Language) 3.6 TENANT FILE REVIEWS AND ON-SITE PHYSICAL INSPECTIONS The Code mandates that MHDC conduct on-site property inspections and perform file reviews for each LIHTC development. Additionally, at the time of inspection MHDC must review any building code violation notices received since MHDC's last inspection. MHDC will review a project's resident files in-house (at MHDC), or on-site at the project, as deemed necessary. 13

18 A. Inspection Requirements 1. The Code requires that MHDC conduct on-site inspections at least once every 3 years. MHDC must conduct on-site inspections of all buildings in the project and inspect at least 20 percent of the project's low-income units. All units occupied by eligible tenants must be made available for random selection during the inspection. MHDC must also review the resident files which includes, but is not limited to, all certifications, supporting documentation and rent records for those units. NOTE: The corresponding file for each unit inspected will be reviewed, In addition, for new projects placed-in-service after January 1, 2001, the Code requires MHDC to conduct the first on-site physical inspection and unit reviews no later than the end of the second calendar year following the year the last building is placed-in-service. 2. MHDC and RD have entered into a "Memorandum of Understanding" (the MOU ). The MOU sets forth that RD will conduct the inspections for developments which RD has financed. These results will be provided to MHDC who will then review the results for compliance with Code requirements. 3. The Owner or an owner s representative is required to be present for on-site reviews. Failure to do so may result in a report of non-compliance to the IRS. B. Notification of Inspection 1. The owner will be notified at least 10 days prior to the arrival of the MHDC compliance officer. The owner, or an owner s representative, must be present to ensure access to the needed records and to answer any questions the compliance officer may have. 2. All residents should be given notice that MHDC will be conducting unit inspections and that their unit may be selected for review. C. Preparation for the On-Site Physical Inspection 1. Appropriate keys must be available to access all individual apartments, boiler rooms, janitorial rooms, storage areas, etc. 2. Copies of any and all building code violation letters/notices received since MHDC's last inspection, as well as records regarding those repairs, must be on-site and available at the time of the review. D. Tenant File Review and Physical Inspection Results At the end of the review, the MHDC compliance officer will conduct an exit interview with the owner or owner s representative to discuss any non-compliance issues discovered. E. Written Notification of Results MHDC will provide written notice to the owner of any issues discovered during the tenant file review and/or the physical inspection. The written report represents only buildings and units inspected during the review. Additional deficiencies requiring correction may exist in buildings and units that were not inspected. The information is collected to ascertain the physical condition of a program property. This is necessary for project owners to receive approvals for future funding actions. The information is nonsensitive and no assurance of confidentiality is given. The owner will be given 30 days to respond to the written notification. Responses must be submitted on Owner/Management letterhead and must address all findings whether corrected or not. Owner/Agents of properties receiving a Below Average or Unsatisfactory rating may appeal their rating in the following sequence: Submit the appeal in writing to MHDC c/o John Driver, Compliance Officer Supervisor, 4625 Lindell, Suite 300 St. Louis, MO The appeal must be post marked within 30 days of the date of the review/rating letter. The appeal must include all facts that you wish to be considered in the final review of the rating. John Driver will offer his recommendation, based on the facts submitted, to Deb Giffin, Director of Asset Management. Deb Giffin will consider the recommendation and issue a final rating, in writing, within 45 days of the date of the appeal submission. 14

19 The decision of the Director is final. The next opportunity to improve a rating will be at the subsequent annual review. NOTE: All items noted for correction in the inspection report must be addressed and responded to within the 30 day timeframe regardless of appeal. F. Corrective Action Plan Should there be any issues that can not be cured within the above mentioned 30 day period, the owner must submit to MHDC a corrective action plan describing how and when the issues will be corrected. The Corrective Action Plan must be updated and submitted to MHDC by the 10 th of every month until all issues are resolved. 3.7 RECORDKEEPING - IRS Regulation (b)(1) Owners are required, by Code, to keep records for each qualified low-income building in the project. The records must show the following for each year in the compliance period: A. The total number of residential rental units in the building (including the number of bedrooms and the size in square feet of each residential rental unit); B. The percentage of residential rental units in the building that are low-income units; C. The rent charged on each residential rental unit in the building (including utility allowances with supporting documentation); D. The number of occupants in each low-income unit; (if rent is determined by number of occupants); E. The low-income unit vacancies in the building and information that shows when and to whom, the next available units were rented; F. The annual income certification of each qualifying low-income resident; G. Documentation to support each qualifying low-income resident's income qualification; H. The eligible basis and qualified basis of the building at the end of the first year of the credit period. I. The character and use of the nonresidential portion of the building included in the building's eligible basis under Section 42(d) of the Code (e.g., resident facilities that are available on a comparable basis to all residents and for which no separate fee is charged for use of the facilities, or facilities reasonably required by the development). 3.8 RECORD RETENTION - (IRS Regulation (b)(1). The owner is required, by Code, to retain the records described in Section 4.7 above for at least 6 years after the due date (with extensions) for filing the federal income tax return for that year. The records for the first year of the credit period must be retained for a minimum of six years after the due date (with extensions) for filing the federal income tax return for the last year of the compliance period of the building. NOTE: Electronic storage of documents is acceptable as long as hard copies of ALL initial qualifying documentation and all tenant file documentation is readily available for review by the compliance staff. 3.9 NON-COMPLIANCE MHDC is required by Code to monitor all LIHTC projects and to report to the IRS occurrences of noncompliance. A notice will advise the owner of any noncompliance, the nature of the violation and specify a period for correction. The owner will then be given a period of time (the correction period) not to exceed 45 days from the date of the notice, to correct the noncompliance issues. MHDC is allowed by Code to provide an extension of up to 180 days. However, any requests for extension must be submitted to MHDC, in writing, prior to the expiration of the original correction period, and will only be granted for good cause as determined by MHDC, in its sole discretion. MHDC is required to report all findings of noncompliance to the IRS within 45 days after the end of the correction period, even if the violation has been corrected. IRS Form 8823 will be sent to the IRS reporting the violation and whether or not it has been corrected. A. Missing Reports, Information or Documentation The owner will have 30 days from the date of written notification by MHDC in which to submit any missing report(s), information, or documentation. This includes, but is not 15

20 limited to occupancy reports, annual Owner's Certificate of Continuing Compliance, utility allowance documentation and financial statements. Note: Documents not available at the time of the inspection but made available within 30 days of the inspection will have no bearing on the inspection rating. B. Code Violations The owner will have 45 days from the date of written notification by MHDC to bring the project back into compliance with any Code provisions which have been violated. C. Correction Information When the owner receives a notification of noncompliance from MHDC, the owner has an opportunity to respond in writing to the letter within the prescribed correction period. Because of the complexity of the LIHTC regulations and the necessity to consider their applicability to specific circumstances, owners are urged to seek competent professional legal and accounting advice regarding compliance issues. Note: The owner's response to a notification of noncompliance may be forwarded to the IRS. Therefore, the owner should send such data or response to correct the noncompliance that the IRS would deem a reasonable cure. MHDC makes no assumptions from the data and does not interpret the information for the IRS. The IRS has provided no guidance or rulings at this time regarding what constitutes a cure of noncompliance. Therefore, MHDC may not indicate to the IRS if the violation was cured. MHDC checks the corrected box on the 8823, consequently, any cure information submitted may not clear the indicated violations with the IRS. It is the sole province of the IRS to determine what constitutes a cure and whether recapture of full or partial credit will occur. It is in the owner's best interest to respond in writing within the allowed time period to all violation letters sent by MHDC. D. Chronic Noncompliance Chronic noncompliance may result in the owner or related entities being denied participation in the Missouri LIHTC Program and potentially recapture of credits. Examples of chronic noncompliance include, but are not limited to: 1. Chronic non-submission of required reports; and 2. Repeated material violations of the Code DISASTER RELIEF Owners are encouraged to rent vacant units to disaster-displaced residents for temporary housing. Please note that the owners are not required to hold vacant units off the market for disaster-displaced residents. In the case of a disaster please refer to for specific guidelines and required documentation for placing disaster-displaced residents. 4. QUALIFYING TENANTS A written application must be fully executed and signed by all adult applicants prior to certification. Applicants for low-income units should be advised early in their initial visit to the development that there are income limits which apply to these units. Management should clearly explain to the applicants that the income and assets over $5,000, of all persons expecting to occupy the low-income unit must be verified by a third party and certified prior to occupancy and on an annual basis thereafter. Please note that for HUD Section 8 and RD Section 515 developments, the HUD and Section 515 annual certification/recertification forms may be used. (See Section 4.6 regarding rehabilitated developments on existing residents) However, RD uses adjusted income to determine eligibility. These figures must be modified to show annual gross income as defined by HUD. See HUD 50058/50059 and RD 1944-A. It is imperative that all sensitive tenant information (bank accounts, social security number, etc.) be treated in a secure and confidential manner. It may be necessary to explain to the applicant that all information provided is considered confidential and will be handled accordingly. 4.1 TENANT ELIGIBILITY 16